What’s Happening With GM’s Pensions?

By Alicia H. Munnell

While the Democratic Party has made the bailout of the automobile companies a talking point in this year’s election campaign, unveiling convention slogans like “Osama Bin Laden is dead and GM is alive,” I, a pension nerd, have been wondering how General Motors’ offer to transform retirees’ pensions into lump sums has turned out. How many of those offered the conversion actually took it? And were those who took it married or single, high-paid or low-paid, older or younger, healthy or sick? Some of that information will never be knowable, but I am really curious whether 20 percent or 80 percent of those offered accepted. I hope that the share was closer to 20 percent.

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GM, in order to reduce its liability, so that it could be immunized and transferred to The Prudential Insurance Company of America, offered 42,000 of its salaried retirees (those who retired between Oct. 1, 1997, and Dec. 1, 2011) the option of accepting a lump sum or continuing to receive their monthly check from Prudential instead of from GM. GM plans to purchase a group annuity contract from Prudential, under which Prudential will pay and administer future benefit payments to most of the remaining U.S. salaried retirees. The offer was made on June 1, and retirees had to decide by July 20.

To those of us who spend our time advocating the automatic annuitization of at least some portion of 401(k) balances so that people will not outlive their resources, the offer to unannuitize — transform lifetime incomes into lump sums — seems like a step in the wrong direction. Retirees with ongoing monthly pension benefits are much more secure than those who have to decide how to allocate their retirement assets over an uncertain lifespan. Retirees with a pension will not outlive their benefits, and they do not have to worry about the ups and downs of the stock market.

Taking the lump sum is a really risky business. Once they get the money, they will have to invest it in order to duplicate anything close to what they were receiving from GM. They are likely to end up paying high fees and facing volatile financial markets. Some retirees have suggested they will take their money and buy an annuity directly from an insurance company. However, it is expensive for individuals to buy annuities on their own, which means that they will end up with lower monthly benefits than they were receiving from GM.

Is there anyone who should take the lump sum? Only those with a serious illness who believe that they do not have much time left should even consider it. The trouble with counting on death, however, is its unpredictability; even sick people may live longer than they expect to.

Some experts say that wealthy people with lots of other assets, who do not rely on their GM pension as their primary source of income, might consider the lump sum. Still, given today’s tumultuous markets, it is unlikely that even the sophisticated investor will be able to generate more income from their lump sum than from their GM pension.

Those who opt to continue receiving their monthly benefit will get their check from Prudential rather than from the GM plan. Because their income is not coming from a pension plan, their benefits are no longer insured by the Pension Benefit Guaranty Corp.

GM’s move is part of a series of lump-sum buyouts. Ford began offering lump sums to retired salaried employees in August, and industry experts predict that both companies will do the same with their union retirees. Other companies are likely to follow the auto industry and off-load their pension promises.

But retirees have the choice, and if they want a secure retirement, almost all of them should say no to lump sums. So, I hope the share that accepted GM’s offer was 20 percent or less.

Comments (5 of 6)

To Fred: It is very unusual for private sector pensions to be indexed for inflation. So switching from a GM pension to an insurance annuity doesn’t seem to change very much for the annuitant, except the possibility that the insurance company would default. Under either circumstance, the annuitant bears the risk of future inflation. Insurance company default is unusual, but in that event, the annuitant would likely get a haircut since state insurance guaranty associations usually have dollar limits.

If an annuitant takes the lump sum, it’s likely he’s going to have a big tax bill in the year of the distribution, so will have less capital available to invest for future income.

The only people for whom this would be a good deal are individuals with very short life expectancies, because getting a lump sum would be better than a brief stream of smaller pension payments.

3:44 pm September 20, 2012

DH wrote:

TO Fred: The pension benefits would be taxed as well, not sure what you’re talking about with the age of 82 either since the pension amount is generally pre-tax money and thus no exclusion ratio would be applied anyway. The exclusion ratio on distributions would only pertain to non-qualified money.

5:12 pm September 19, 2012

Mike wrote:

PensionGuy, what is your point!

2:38 pm September 19, 2012

PensionGuy wrote:

Many of the retirees had pensions that exceeded the PBGC coverage. Therefore, if GM actually declared bankruptcy, the pensions would have been cut to PBGC maximums, well below their current value. All life insurers are supported by state guaranty associations if the insurer becomes insolvent. No annuitant has yet to lose a dime from an insurer insolvency.

2:28 pm September 19, 2012

Fred wrote:

And what will happen to those receiving annuity when the inflation kick in, since those are not indexed for inflation?
What will be the purchasing power of the Dollar 20 years from now?
The recipients pay regular income tax on those annuities and after age 82, all of the income will be taxable and there will be no more exclusion ratio of the income applied.

All those workers that took the annuity will be losers and wished they took the lump sum instead.

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About Encore

Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.